Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 9 - Derivatives and Hedging Activities

We are exposed to changes in interest rates, primarily relating to changes in interest rates on our first lien term loan. Consequently, from time to time, we may use interest rate swaps or other financial instruments to manage our exposure to interest rate movements. Our primary objective in holding derivatives is to reduce the volatility of cash flows associated with changes in interest rates. We do not enter into derivative transactions for speculative or trading purposes.

We recognize derivative instruments and hedging activities on a gross basis as either assets or liabilities on our Condensed Consolidated Balance Sheets and measure them at fair value. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the earnings effect of the hedged forecasted transactions in a cash flow hedge. For derivatives designated as cash flow hedges, the change in the estimated fair value of the effective portion of the derivative is recognized in Accumulated other comprehensive income (loss) on our Condensed Consolidated Balance Sheets. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. Gains and losses resulting from valuation adjustments on dedesignated portions of our derivative contract subsequent to dedesignation of hedge accounting are recorded within Interest expense, net on our Consolidated Statements of Operations. As it is not probable the forecasted transaction will not occur, the amounts in Accumulated other comprehensive income (loss) as of the date of dedesignation will be released based on our original forecast.

In the first quarter of 2021, concurrent with the prepayment of $356.4 million aggregate principal amount of the first lien term loans outstanding under the First Lien Credit Agreement, we fully dedesignated the interest rate cap contract and partially dedesignated $100.0 million of the notional amount of one of the forward-starting interest rate swap contracts. In the third quarter of 2021, the Company redesignated $100.0 million of available notional of the partially dedesignated forward-starting interest rate swap contract and redesignated $100.0 million of available notional of the interest-rate cap contract in connection with the incurrence of an incremental $200.0 million of variable-rate debt under the First Lien Credit Agreement.

In the second quarter of 2022, two interest rate swap contracts in the notional amount of $350.0 million matured. Interest rate swaps in the notional amount of $500.0 million became effective in April 2022.

In the third quarter of 2022, the Company sold $400.0 million of the notional amount of the interest rate cap contract which was not designated as an accounting hedge. We recognized a gain of $3.0 million, partially offset by the derecognition of $2.5 million of derivative assets, resulting from this sale within Interest expense, net on our Consolidated Statements of Operations.

As of September 30, 2022, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk ($ in millions):


Interest Rate Derivatives (Level 2)	Number of Instruments	Notional Aggregate Principal Amount		Interest Cap / Swap Rate		Maturity Date
Interest rate cap contract	One	$	100.0	3.500	%	April 30, 2024
Interest rate swap contracts	Two	$	500.0	0.370	%	January 30, 2026

The following table summarizes the fair value and presentation on our Condensed Consolidated Balance Sheets for derivatives as of September 30, 2022 and December 31, 2021 (in millions):


	Fair Value of Derivative Instruments
Instrument	September 30, 2022				December 31, 2021

	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments
Interest rate cap contract(1)	$	—	$	—	$	—	$	0.1
Interest rate cap contract(2)	0.8		—		—		—
Interest rate cap contract(3)	0.6		—		—		—
Interest rate swap contracts(1)	—		—		—		2.4
Interest rate swap contracts(2)	19.2		—		—		—
Interest rate swap contracts(3)	37.2		—		—		—
Forward-starting interest rate swap contracts(2)	—		—		0.7		—
Forward-starting interest rate swap contracts(3)	—		—		15.2		—
Total designated derivative fair value	57.8		—		15.9		2.5

Derivatives not designated as hedging instruments
Interest rate cap contract(1)	—		—		—		0.3

Interest rate cap contract(3)	—		—		0.1		—
Total undesignated derivative fair value	—		—		0.1		0.3
Total derivative fair value	$	57.8	$	—	$	16.0	$	2.8

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(1) Included in Accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheets.

(2) Included in Prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.

(3) Included in Deferred costs and other assets, net of current portion on our Condensed Consolidated Balance Sheets.

The change in fair value of any derivative instruments was recorded, net of income tax, in Accumulated other comprehensive income (loss) on our Condensed Consolidated Balance Sheets to the extent the agreements were designated as effective hedges. In the period that the hedged item affects earnings, such as when interest payments are made on the Company’s variable-rate debt, we reclassify the related gain or loss on the interest rate swap cash flow hedges and any receipts on the cap to Interest expense, net and as operating cash flows on our Consolidated Statements of Cash Flows in the period settled in cash. Income tax effects from changes in fair value of derivative instruments are recorded on our Consolidated Statements of Operations when the derivative instruments are settled. Over the next 12 months, we expect to reclassify approximately $19.9 million into interest income from AOCI.

Refer to the Company’s Consolidated Statements of Comprehensive Income (Loss) for amounts reclassified from AOCI into earnings related to the Company’s Derivative Instruments designated as cash flow hedging instruments for each of the reporting periods.